White House Gives the Go Ahead to Waterboard Bondholders

If water -boarding of terrorists is torture and as a result criminal , why is it that the financial equivalent of water-boarding is now routinely practiced not by the CIA on terrorists, but by the White House, Treasury and The Fed on bondholders, investors and CEO's.

Water-boarding was part of the enhanced interrogation techniques the CIA used to extract information from enemies of the United States. Enhanced interrogation techniques are performed outside of the normal interrogation process that is used on enemy combatants. When the government chose to restructure the failing automakers outside of the normal process (a bankruptcy proceeding is the normal process when you are insolvent) they did so for a reason, and yesterday that reason became crystal clear.

Keeping the Automakers out of bankruptcy, and thereby removing the necessity that the restructuring move forward based on "The Rule of Law", was paramount if the Unions were to have any hope of securing the payment of their unsecured VEBA health care trust claim. A big win for the Politically savvy and well connected UAW, but a terrible loss for the bondholders and taxpayers who will foot the bill.

Only in the political arena could two unsecured creditors receive vastly different treatment, as have the Bondholders and the Unions. The UAW, whose unsecured VEBA is owed $10 Billion by GM, will receive 39% of the GM stock; the Bondholders, who are owed $28 Billion, will receive 10% of GM stock . Do the math: the Union has received 10 times what the government expects the bondholders to take in this restructuring.

In the Chrysler deal, the Union fared even better, as they were unsecured creditors and the Chrysler bondholders were secured creditors. The bondholders received 28% of the value of their $6.9 billion in bonds in cash; the Union will receive stock worth approximately $4.2 billion, and a note for an additional $4.58 billion, which represents 82% of the value of their claim. Either the government negotiators have dyslexia and have made a terrible mistake in their paperwork, or this is political payoff WRIT LARGE. Is this not the equivalent of financial waterboarding?

And thus we enter a brazen new era of government, when the White House is openly complicit in the theft of, as a matter of fact is directing, the looting of private property from investors. Welcome to the Rule of Man, or as the President calls it, change we can believe in! Where campaign contributions mean everything and the rule of law, not so much.

Exactly what did he mean when the President of the United States said;
"Let me be clear. The United States government has no interest in running GM. We have no intention of running GM." Apparently he meant it's not an interesting job, but we are going to do it anyway!

Back to Prosperity ? Tea Parties Show the Way

While reporting on the nationwide Tea Party Protest, Larry Kudlow spoke about the idea that the United States should become a tax haven; a country whose tax laws would encourage capital formation and attract investment capital from around the world to fuel not just a recovery but an economic resurgence. This very simple yet very powerful economic idea would produce greater prosperity for everyone, greater than all of the government handout programs enacted to date.

The Tea Party Movement shows the electorate is ready for just such an alternative. The outrage over the bailouts and growing government intervention into every part of our lives has finally touched a nerve. The progressives who are dismissing this movement as nothing more than a fringe group fail to understand that all change takes place at the margin. When Grandmothers and Grandfathers both democratic and republican are demonstrating not for increased benefits but for less spending they are the voters at the margin. What the Tea Party demonstrators instinctively understand is that this "Government Intrusion" is fueled by the ever growing tax burden they must bear.

Their furor grows as Federal, State and Local government spending increases, continue unabated during a recession, funded with a whole host of new taxes on them to pay for it all. The disconnect is striking as they watch the private sector cut jobs and expenses to regain profitability, while the ever expanding public sector continues to hire new workers and increase the pay and benefits of existing employees. Is this responsible government?

The key to capitalizing on this movement is to unite these disparate groups into a coalition of tax payers who have had enough and not fracturing this movement by segmenting them according to which tax they may or may not pay. Does it really matter if it is your income or real estate, or social security tax burden that is too high? Throughout last year's campaign we heard too often about how some people who were not paying income taxes were going to get a tax refund and not often enough about how taxes of all kinds have risen to unacceptable levels. All taxes are a tax on income.

The Democratic argument that we are simply going back to Clinton era tax rates is nothing if not disingenuous. When the top marginal rates were increased in the early 90's real estate, social security and sales taxes were nowhere near the level they are today. Politicians know that by dividing people according to which tax they pay they can turn one group of overburdened taxpayers against another and continue their reckless spending .

High rates of tax on labor (the social security combined rate is 15.6%, up to $106,800 of income), income ( the personal income tax rate is scheduled to return to 40+%) and capital ( divendend and capital gains rates are inceasing) serves only to assure that they remain scarce commodities. What this economy lacks is investors willing to deploy additional capital, to employ additional labor at higher income levels. More people earning more income can better provide for themselves, thus greatly reducing the need for government to provide services. Governments at all levels need to cut spending in order to reduce the tax burden on those who choose to work and invest their money to provide the jobs this economy needs so that individuals will have the resources to support themselves.

When You Shake Hands With the Devil ... Better Count Your Fingers

It took Ford's CEO Alan Mulally two trips to Washington to figure out that the bailout money the government was dangling in front of him was really a pact with the Devil, fraught with peril, but figure it out he did and so he and Ford survive to live another day. GM and Chrysler however weren't as lucky. They couldn't or wouldn't see the handwriting on the wall, and thus have sealed their own fate.

Chrysler's CEO Robert Nardelli is now forced to negotiate a do or die deal with Fiat, as his partner the devil holds a gun to his head and whispers in his ear "cut a deal in 30 days or you my friend are toast". Rick Wagoner, GM's CEO, has been shown the door, and GM has been given 60 days of operating capital to conclude it's restructuring. All we can say is good luck... you are going to need it!

Is it possible that GM will be able to do in 60 days what it hasn't been able to do in the last 20 years? No! It can't, and won't. If GM wants to survive as a company and not as the host organism for the parasitic UAW, it should make the long over do announcement that it will be seeking bankruptcy protection under Chapter 11 in order to reorganize its business. If it doesn't, it may exist for a brief period of time as a scaled down post office type operation, making tiny eco- friendly cars that won't take you very far, while providing jobs with above market compensation and benefits for a small number of politically connected autoworkers. But its days will be numbered, and when the operating losses become too great, and they will, for the UAW's Democratic allies to continue to provide the necessary political cover they too will cease to exist.

How is it that GM got things so wrong? They seemed to be under the false impression that because the Democratic party was beholden to the UAW's campaign contributions afforded by it's dues paying members, that somehow it was safe to sleep with the enemy. I hope they know now what they should have known then; it is never safe to sleep with your enemy! They failed to realize that they were never going to get a fair shake in the political arena. Without the protection of the bankruptcy laws and the threat of a court imposed settlement, the company will continue to be stuck between a rock and a hard place in it's negotiations with a recalcitrant union that won't budge and bondholders who don't want to be sacrificed to placate the UAW.

There is a lesson here in dealing with a government that disdains the rule of law and thirsts for ever more power and it is a simple one: When you shake hands with the devil, you better count your fingers!

So This is Saving the Economy?

What is it going to take to discredit the "Economic Fine Tuning Crowd" so that they will take a break from their massive intervention in the not so free markets in order that a recovery might actually get underway? How is it that there are still people who believe in the ability of the government to "Fix" the economy?

If there is anything that we have learned in the past year, it has got to be that the government interventions to save the economy have done anything but save the economy. Saturday, March 14 will mark the one year anniversary of the Shot gun Wedding arranged by the Fed of JP Morgan and Bear Sterns. Bear, the blushing bride, was forced to walk down the aisle with Morgan in order to save the banking system, and sacrificed to save the families reputation, so to speak. That Friday, the DJIA closed at 12,145, the S&P 500 at 1,315 and the NASDAQ at 2263. A year after the start of "Rescue Mania", all three of the major market indexes are at about half of their year-ago values. This is what the government considers a rescue plan?

Perhaps if we examined the other recipients who have benefited from government bailouts, we'd find that they are in much better shape. This might then account for the lingering belief in the ability of the government to rescue troubled companies. Roll call: AIG? CITI? Bank of America? Fannie & Freddie? GM? Chrysler? Nope! The story is pretty much the same. Rather than being the elixir of life, government bailouts seem to be a curse, turning seriously ill companies into zombie-like firms that move aimlessly about consuming increasing amounts of taxpayer dollars, but never recovering from their zombie-like state.

After working their magic rescuing corporations, it seems they are now getting serious about bailing out/rescuing the homeowner with an effort to pass a cram-down law that will legalize theft. Someone borrowed money from a bank to buy a home and will legally not be obligated to pay it back. What else would you call this? The idea that things will improve in the mortgage markets because the government has created significant additional risk to bank capital flies in the face of economic logic. Why don't they just pass a law making it legal to rob banks?

When the result of the rescues are this bad, I think that a legitimate argument can be made, like the one we made in September, that doing nothing would have produced a better outcome. Had we done nothing, could the markets be considerably worse off? One thing we know for sure is that had we done nothing, we would not now be on the hook for the trillions in debt the bailout/rescue/recovery plan will cost us.

The Government rescue plans aren't rescuing! Republican led bailouts didn't work, and the Democrat led bailouts aren't working either. I think what is needed is a "bailout intervention" led by the taxpayer. Maybe that would snap them out of their denial and force them to abandon this reckless behavior.

Part of the problem is that politicians don't want to admit that they don't know what they are doing. With great confidence, they tirelessly repeat a version of what their staffer who spoke to another staffer who heard an economist supporting their plan said, with the version enhanced just a little bit each time it was repeated. The truth is the economist who they claim is supporting their view point is no where near as sure of the outcome as is the politician who doesn't know a thing about economics claims to be. After listening to Pols this last month we all know that government infrastructure spending has a 1.54 multiplier effect. That's good, right? Well it seems that only the politicians are sure of this, and the economists think that this might be the case, but really aren't all that certain. Can you imagine the malpractice suits if the government was held to the same standards that your doctor is?

Actions have consequences, and the consequences of compounding one mistake with another aren't good. Here is my suggestion: the Congress should take an early and extended Spring Break this year. They should go back to their districts or to the beach and just hang out for a while, but before they go they should do us all a favor and ditch the mark to market accounting rules that are choking the banks. This would give the banks and the rest of us in the private sector a little breathing room and some time to get the economy going again.

Our Share The Wealth Charlatans

I just finished re-reading Henry Hazlitt's "Economics in One Lesson". The book is timeless, and except for the style of writing, one would think that it was written as a commentary on the many problems we face today. Have a look, and you'll find the real solutions to our economic woes aren't the ones that are being offered today.

It exposes our politicians as the "Share the Wealth Charlatans" they truly are. Their latest endeavor to conjure up greater demand in the economy with wasteful spending, under the guise of stimulus, is a prime example. A massive, yet ineffective spending bill produced in haste at a critical point in our economy, when what we truly need are economic policies that are Pro-Growth. Governments don't create jobs, only expanding economies do.

According to the author, politicians don't understand that Supply and Demand are two sides of the same coin, and that it is Supply that creates Demand! The author correctly states, "The supply of the thing they make is all that people have, in fact, to offer in exchange for the things they want".

What our economy needs to do now is expand. In order for that to happen we need to provide incentives for existing businesses to increase production, and for entrepreneurs to start and grow new enterprises. The benefits of Employment always beat unemployment benefits hands down. Sadly, there is next to nothing in this largest ever government plan that could possibly be seen as encouraging business to expand production and hire additional employees. The key to this economic recovery, as all others before it, will only be found on the Supply Side of the equation.

Are we supposed to believe that in a trillion dollar stimulus bill there was no room at all to reduce marginal tax rates on individuals and corporations in order to reward their hard work and efforts? The same folks who scream that wages for the middle class have not risen fail to make the connection that it is greater capital investment driving productivity that allows wages to rise. These class warriors see the capital gains tax as a club with which to pummel the employer class for it's success. Yet it is the very workers they claim to represent who take a beating when investors refuse to risk their capital, because the rules have been stacked against them. Less capital equals lower productivity, stifling both job creation and wage increases. No Pro Growth policies allowed, just isn't a winning slogan!


Another theme developed in the book is the propensity of politicians to speak to only one side of an argument. They speak only of the positive effects their legislation will have on the group that they are currying favor with. Never do they address the effects their program will have on the rest of us. We have been told over and over again how the stimulus package will save jobs for teachers, firemen, police officers and state workers, yet I don't recall the President ever mentioning the CBO's warning that the spending bill would negatively impact the economy and the rest of us for years to come. The cost side is what you never hear about. Yes, we all know what the price of the stimulus bill is, a $1 trillion dollars give or take. There is precious little discussion, however, about the real cost to our economy that diverting this enormous amount of capital, which otherwise would have been allocated towards profitable endeavors by the free market. Instead, it will now be directed by politicians with an eye on reelection.

We now have another new program to bailout people who are not in foreclosure, but who soon might be? The same one- sided scare tactics are being used to help try and sell it. We are now being told that if even one home in your neighborhood goes into foreclosure, it will reduce the value of every other home in that neighborhood. With the failure rate of these types of programs near 60%, what is their point? Better yet, what is the other side of the argument that we are not hearing? Person A lent money to Person B , who freely entered into a transaction to benefit himself. Person B now is unhappy with the outcome of his transaction, and wants to renegotiate. It's a little late, don't ya think? The government wants to enable judges to cram down mortgages, which simply means that person B pays Person A back less than what he borrowed and at a reduced rate of interest. If this wasn't sad it would be funny, because it is being done at the same time banks are being excoriated for not lending! Can you blame them?

A very elementary idea that our politicians have forgotten, or more likely never learned is the following: One occupation can expand only at the expense of all the others! They never reflect on the idea that their government directed spending plans can only occur by denying existing industries and start up enterprises the capital and labor needed for them to expand or begin production.

We have come through a period of time characterized by the love of one's house, but has McMansion mania increased prosperity? Apparently not, or the problems we face today would not be joblessness and foreclosure. Why then does the government continue to direct additional resources to a sector of the economy that has already seen massive over- investment? If "investing" in our houses were truly the path to prosperity, we should be in economic nirvana considering the vast resources that have been poured into creating more and bigger homes over this past decade. I think rather than additional programs to aid housing in the hopes that it will lead us out of this recession, it's time to toss in the towel and admit what a terrible failure the government subsidization of home ownership has been.

The government cannot change the laws of economics. Home prices will continue to fall until they reach a market clearing level, with or without these unworkable government handouts. If we let the market work, we will be out of this mess sooner rather than later, and without the massive amounts of additional debt these programs will entail.

The Heads You Lose Tails They Win Stimulus Plan

Even the people promoting this Massive Government spending spree don't have anything good to say about it. I watched "This Week with George Stephanopolus", and heard the former Secretary of Labor for the Clinton Administration and a proponent of the "Stimulus Bill", Robert Reich, say the following about the bill after chastising Republicans for their lack of bipartisanship in helping to pass it:

"They [ Republicans] realize in two years even with a Stimulus, even with a Big Bank bailout the economy is very unlikely to be better than it is today. If you don't have a stimulus it's going to be much worse."


My first thought was to wonder why the Democrats wouldn't want all the credit for this masterful legislation that is going to save us from the certain doom that they tell us is surely heading our way? I thought about what he said, and replayed the segment again just to make sure of what I had heard him say. The Democrats are telling us that we must pass the Stimulus, because if we do then things will stay about the same for the next two years and if we don't we are all doomed! So far I wasn't sold on his line of reasoning for passing this boondoggle of a bill. Maybe it would improve. I hoped so.

But then he said:

"We can not underestimate how bad the economy is right now, it is falling off a cliff, I mean if there is ever a time for bi-partisanship, people joining together and saying we don't know if we got the right answer but we got to do something and this looks like the right direction, it is absolutely now. When I said before that by midterm elections we are not going to see an economy that is better than now I mean not that the stimulus program will have failed but that even if the stimulus succeeds it will not actually kick in... it will not get the economy better than it is now... without the stimulus the economy could be far worse than it is now."

So Mr. Reich is saying that after borrowing a Trillion dollars to spend on a series of programs to stimulate the economy, the best we can hope for by the mid term elections in November of 2010 is for the economy to be falling off a cliff. Was that meant to reassure me ?

Here is where he tries to play economist trotting out his best "Keynesian Bond Illusion" speech:

"We know that the real problem right now on the demand side of the equation is that businesses and individual consumers are not buying. That is rational they are not buying because they don't have the money and they don't want to go deeper into debt. But if they don't buy, government is the purchaser of last resort. Now that is old fashioned Keynesianism, but it is correct for today."


Here he is saying that businesses and consumers are being rational by not borrowing money and going further into debt in order to support consumption. Evidently, when people act rationally it is time for the government not to! So now it's the governments turn to act irrationally, borrow money, go deeper into debt and spend it because consumers aren't. I'm still not persuaded by his line of logic . He continues on:

"I'll give you two reasons Because we tried a little bit of that last spring with that tax rebate and it turns out that people rationally paid down their debts and they saved and that's good for the individual but that doesn't get spending out there, that doesn't create jobs."

So again he says when the people are rational, rebates don't work and the government needs to step in and be irrational for them. If Jay Leno said this we'd all know he was joking, but when Robert Reich says this it is serious government policy. I guess it's all in the delivery! To me it sounds as though he is making an argument for removal of the rebates and credits from this bill.

Here is what the guy who is a heartbeat away from the Presidency had this to say about the Stimulus Bill. Notice it is chock full of escape routes in case it fails. I wish he would just go into hiding somewhere, and I'm willing to bet you that Obama wishes the same too! Joe Biden, in a speech the other day, said the following:

" You know if we do everything right, if we do it with absolute certainty, if we stand up there and make really tough decisions, there is still a 30% chance that we are going to get it wrong."


What are the odds that the government is going to get everything right? When do they make any tough decisions? What surprises me the most is that politicians, who are usually so certain about everything, aren't the least bit sure about the effects that over a trillion dollars of additional spending will have on the economy. If they don't do everything right that means the odds that they are going to get it wrong will go up. Maybe there will be a 50-50 shot that they get it right? I think it's way past time for a reality check when our Leaders are telling us they must borrow and spend a $1,000,000,000,000.00, and the odds of them getting it right are only as good as a coin toss or worse. This sounds to me like heads I lose, tails they win !!!

Truer Words Were Never Spoken

But it Takes More than Rhetoric to Lead a Country!

“Taxes are paid in the sweat of every man who labors because they are a burden on production and are paid through production. If those taxes are excessive, they are reflected in idle factories, in tax sold farms , in hordes of hungry people, tramping the streets and seeking jobs in vain. Our workers may never see a tax bill, but they pay. They pay in deductions from wages, in increased cost of what they buy, or as now in broad unemployment through out the land. There is not an unemployed man, there is not a struggling farmer, whose interest in this subject is not direct and vital. It comes home to everyone of us.”

This guy or gal knew their stuff! They nailed it! They knew that higher taxes act as a wedge, increasing the price of goods and services. They saw that as this wedge increased, it pushed buyers and sellers further apart until transactions that normally would have been concluded, failed. They saw that the solution to unemployment and idle factories was to reduce the burden that government had placed on business by reducing taxes. They saw that this would inure to everyone's benefit.

Who was the great man or woman who spoke these words? Was it Ronald Reagan or Margaret Thatcher? No. You say it had to be someone with a much better grasp of how to solve the economic problems we are encountering. If you are guessing Barack Obama, you're still wrong. I'll give you all the guesses you want and you'll never guess who spoke these words and when, so I might as well tell you. First, lets talk a little bit about the idea behind these words .

This wasn't an original thought on his or her part, it was something he or she had learned from someone before him or her. People knew the burden that taxes and regulations placed on the individual, so who was it that imparted such wisdom on him? Was it the Chinese Philosopher Confucius who lived 2,400 years before him? When confronted with similar problems, Confucius had said nearly the same thing. A US President and a Chinese philosopher on the same economic page? I can't believe it, you say. Here is how Confucius did say it:

Duke Ai asked asked Yu Zo : It has been a year of famine and there are not enough revenues to run the state. What should I do ?

Zo said “ Why can't you use a 10 percent tax?

The Duke answered : I can't even get by on a 20 percent tax, how am I going to do it on 10 percent?

Zo said , “If the people have enough what Prince can be in want? If the people are in want how can the Prince be satisfied”

- Analects of Confucius (12:9)

Maybe it came from the works of the 14th Century Muslim philosopher, scholar and economist IBN-Khaldun, who wrote the following about taxes and regulations:

In the early stages of the state , taxes are light in their incidence , but fetch in a large revenue; in the later stages the incidence of taxation increases while the aggregate revenue falls off. Now where taxes and impost are light, private individuals are encouraged to engage actively in business: enterprise develops, because men feel it worth their while, in view of the small share of their profits which they have to give up in the form of taxation. And as business prospers ... the total yield of taxation grows. From this you must understand that the most important factor making for business prosperity is to lighten as much as possible the burden of taxation

Perhaps the writings of Jean-Baptiste Say,were the origin of his thinking :

A tax is not productive to the public exchequer in the proportion to it's ratio[rate] ... it had become sort of apothegm, that two and two do not make four in the arithmetic of finance. Excessive taxation is a kind of suicide, whether laid upon objects of necessity, or upon those of luxury.

Were it not almost self evident, this principle might be illustrated by abundant examples of the profit the state derives from a moderate scale of taxation, where it is sufficiently awake to it's own interests.

The idea may have been copied from another President, who saw it as a way to increase production after the end of the war. Here is what he said :

An expanding prosperity requires that the largest possible amount of surplus income should be invested in productive enterprise under the direction of the best personal ability. This will not be done if if the rewards of such action are very largely taken away by taxation. If we had a tax whereby on the 1st working day the government took 5 percent of your wages, on the second day 10 percent, on the third day 20 percent, on the fourth day 30 percent, on the fifth day 50 percent, and on the sixth day 60 percent, how many of you would continue to work on the last two days of the week?

No, it wasn't Richard Nixon. He was all about higher taxes and price controls (regulation). I was there and can tell you it didn't work. Those words were spoken by Calvin Coolidge as a way to reinvigorate the economy in 1924.

Okay, it must have been learned from Art Laffer, who along with Robert Mundell and Jude Wanniski resuscitated Classical Economics in the 1970's and provided the intellectual underpinnings of the Reagan Revolution, right? Wrong! Here is a hint: When these words were spoken Art Laffer hadn't been born yet. But here is what Arthur Laffer did say about taxes:

The theory is simply saying that at these higher tax rates (“in the prohibitive range”) there is a disincentive to make more money, which will result in lower revenues from taxes. In the end, it's really all about incentives to work, invest, take risks and earn money.

Sorry for dragging this out, but I wanted to show you what thousands of years of economic history have taught us: low taxes and moderate regulations are what enable economies to thrive. The person who espoused the ideas in the first quote that excessive taxes hurt the economy probably didn't learn them from anyone I have quoted. This idea was self evident worldwide until 1932, when the person who spoke these words betrayed their very ideals and went on to pursue the greatest expansion of government through increased taxation and regulation that this country had ever seen. That fellow, you might now have guessed, was Franklin D Roosevelt, who knew what to do, but didn't!